Duration is a measure of the sensitivity of a bond’s price to changes in the yield to maturity. Durations acts as a common platform to measure risk of a bond. When bonds have the same duration, they carry the same element of interest rate risk, irrespective of their coupon rates and market yields. Duration enables an investor to directly compare the risks of bonds with different face values, maturities, coupons, etc. The concept of duration was first defined by Frederic Macaulay in 1938 in his book “The Movement of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856.” As a result, approach to duration that he suggested is known as Macaulay duration. Since the development of Macaulay duration, a closely related measure known as modified duration has become widely used in many applications. Modified duration just has to be divided by (1+rate) to get the modified duration, which is critical in understanding the impact of yield movements on prices of bonds.

Macaulay duration is the sum of the present values of a bond’s time-weighted cash flows divided by the bond’s price. In the special case of a zero coupon bond, Macaulay duration equals the bond’s maturity. That is because, there are no intermediate cash flows and hence the term to maturity of the bond equals that of the duration.

Duration is a measure of the sensitivity of a bond’s price to changes in the yield to maturity. Durations acts as a common platform to measure risk of a bond. When bonds have the same duration, they carry the same element of interest rate risk, irrespective of their coupon rates and market yields. Duration enables an investor to directly compare the risks of bonds with different face values, maturities, coupons, etc. The concept of duration was first defined by Frederic Macaulay in 1938 in his book “The Movement of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856.” As a result, approach to duration that he suggested is known as Macaulay duration. Since the development of Macaulay duration, a closely related measure known as modified duration has become widely used in many applications. Modified duration just has to be divided by (1+rate) to get the modified duration, which is critical in understanding the impact of yield movements on prices of bonds.

Macaulay duration is the sum of the present values of a bond’s time-weighted cash flows divided by the bond’s price. In the special case of a zero coupon bond, Macaulay duration equals the bond’s maturity. That is because, there are no intermediate cash flows and hence the term to maturity of the bond equals that of the duration.